Santander's Global Expansion And Innovation Set To Drive Impressive Revenue Growth And Efficiency Gains

Key Takeaways

• Strategic expansions in digital onboarding and cross-border operations enhance revenue growth and fee income globally.
  
• Operational efficiencies through simplification and automation improve cost control and net margins.
  
• The bank faces potential risks to profitability and earnings growth due to regulatory impacts, rate sensitivity, and operational challenges across various markets.

Catalysts

Provides various financial services worldwide.

• Banco Santander's operational efficiencies through simplification, automation, and leveraging global platforms could drive substantial improvements in cost control and efficiency ratios, potentially enhancing net margins.
  
• The bank's strategic efforts in expanding customer growth, and improving user experience through innovations like digital onboarding, are likely to result in higher revenue growth across its global footprint.
  
• Santander's focus on increasing cross-border operations and collaboration, particularly in Consumer, Wealth, and CIB, can drive fee income growth, translating into enhanced revenue streams.
  
• The ongoing ONE Transformation initiative aims to create a more integrated operating model, potentially leading to sustained cost reductions and operational leverage, thereby increasing net earnings.
  
• Expansion of global platforms like Payments Hub and initiatives like launching Openbank in the U.S. could improve scalability and market presence in key regions, contributing to revenue growth and supporting a stable earnings outlook.

Banco Santander Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco Santander's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.6% today to 18.0% in 3 years time.
• Analysts expect earnings to reach €11.5 billion (and earnings per share of €0.79) by about November 2027, down from €11.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €13.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2027 earnings, up from 5.9x today. This future PE is lower than the current PE for the GB Banks industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 1.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Banco Santander Future Earnings Per Share Growth

Risks

• The impact of the ruling on the Motor Finance business in the U.K. creates uncertainty and potential provisioning needs, which could affect future profits and capital allocation.
  
• Organic capital generation could be constrained by macroeconomic changes, affecting reinvestment in profitable growth and possibly impacting earnings growth projections.
  
• Significant operational changes in markets like Spain and Brazil may involve risks in execution, potentially affecting cost efficiencies and net margins.
  
• The bank's sensitivity to rate changes in regions like Brazil could present downside risks to net interest income if the rate environment shifts unexpectedly.
  
• Higher deposit betas in regions such as Portugal may lead to further net interest margin compression, impacting earnings growth and profitability targets.

Valuation

• The analysts have a consensus price target of €5.72 for Banco Santander based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €6.32, and the most bearish reporting a price target of just €4.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €63.7 billion, earnings will come to €11.5 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of €4.52, the analyst's price target of €5.72 is 21.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.